Editor’s Note:  We will begin using this updated version of the Asbury 6 effective as of the close on 10-24-2023

Introduction

We have spent the past several weeks testing each of the individual metrics that comprise the Asbury 6 to determine how well they perform as Tactical indications of US stock market direction — both individually and as a whole within the “A6”.  We have made several changes, including some minor adjustments to two existing Asbury 6 metrics and one replacement of a previous metric with a different one.  These changes have resulted in a much better, more responsive model that has managed to stay right with the S&P 500 over the past five years during uptrends and downtrends alike, but with only about half the risk. 

Unlike our CPM+ Model, which operates within a Strategic time frame and only averages about four trades per year, this updated version of the Asbury 6 is very sensitive to daily changes in market conditions.  It should help investors to better answer the question that we are most frequently asked by subscribers: “Should I be increasing or decreasing my exposure to equities right now, and by how much?”

How We Improved the Asbury 6 & Why It’s Important

The Asbury 6 is a data-driven risk management model that uses six diverse market metrics to objectively determine the daily health of the US stock market.  The model assigns a positive or negative rating to each of its six constituent metrics based on their current condition and trend. The model then aggregates the ratings to produce a composite score that ranges from zero (all negative) to six (all positive). The higher the score, the healthier the market is and the lower the risk of a major correction. The lower the score, the weaker the market is and the higher the risk of a significant decline.

Asbury Research believes that financial markets change over time and, with that, the veracity of different indicators will ebb and flow with these changing market conditions.  Considering recent changes in market conditions, particularly regarding interest rates and Federal Reserve policy, we have made some minor changes and updates to the Asbury 6™ to ensure that we are providing our subscribers with the very best tools to address the latest market conditions.

The most significant change that we made in the “A6” was to replace the Corporate Bond Spread component, which utilized the BofA Merrill Lynch US High Yield Bond Spread, with a volatility metric, the CBOE Volatility Index (VIX). 

High Yield Corporate Bond Spreads had been a strong market indicator over the past 10-15 years, especially in a Federal Reserve-induced low interest rate environment.  By having the lower boundary of the spread essentially fixed, the spreads versus high yield bonds were allowed to flow virtually independent of the Fed and thus provided a pretty consistent gauge for the market.  More recently, however, with the Fed allowing Treasury yields to fluctuate with market conditions, the spread between high yield corporate bonds and Treasury yields has had considerably less predictive value.  So, especially considering that the Asbury 6 already has a fixed income component (the Relative Strength of Stocks versus High Yield Bond prices), we replaced the Corporate Bond Spread component with the CBOE Volatility Index (VIX).  The other changes to the Asbury 6 were relatively minor in nature and pertained to how we utilize the Rate of Change and Trading Volume components of the model.

The updated list of constituent metrics to the Asbury 6 appears below, with a brief explanation of each.

  • Market Breadth: This measures the number of stocks that are participating in the market’s movement. A healthy market should have broad participation, meaning that most stocks are moving in the same direction as the market index. A narrow market, on the other hand, indicates that only a few stocks are driving the market’s performance which could signal weakness or vulnerability.
  • Volume: This measures the amount of trading activity in the market. Volume indicates urgency to buy or sell.  High volume means that many investors are buying or selling, which suggests strong demand or supply. Low volume means that few investors are trading, which implies weak interest or indecision.
  • Relative Performance: This measures how different segments of the market are performing relative to each other. Relative performance can reveal which areas of the market are leading or lagging, and which ones are likely to outperform or underperform in the future. For example, if small cap stocks are outperforming large cap stocks, it may indicate that investors are more willing to take risks and favor growth-oriented companies.
  • Asset Flows: This measures the flow of money into and out of different types of investments.   Asset flows indicate investor conviction and can show where investors are allocating their capital and what their expectations are for various asset classes. For example, if money is flowing into bonds and out of stocks, it may signal that investors are seeking safety and lower volatility.
  • Volatility: The CBOE Volatility Index (VIX) measures the expected future volatility of the S&P 500 stock market over the next 30 days. It is calculated by the CBOE Options Exchange using the prices of S&P 500 index options with near-term expiration dates. The VIX is also known as the fear index because it tends to rise when investors are uncertain or fearful about the market conditions.  The VIX is widely used by investors, traders, and portfolio managers as a way to measure market risk and sentiment.
  • Price Rate Of Change: The rate of change (ROC) is the speed at which a variable changes over a specific period of time. ROC is often used when speaking about momentum and can generally be expressed as a ratio between a change in one variable relative to a corresponding change in another.  Graphically, the rate of change is represented by the slope of a line.

As a part of our efforts to update and improve the Asbury 6, we back tested it as an incremental style model.  The goal was to provide some “hard” numbers to measure its veracity as a data-driven daily indication of the stock market’s real internal health.  We kept the testing simple and clear by assigning each metric in the Asbury 6 an equal weighting of 16.7%.  For example, if one indicator was positive for a particular day, we would invest 16.7% percent of our hypothetical portfolio into the SPDR S&P 500 ETF (SPY).  Two positive indicators would put us at 33.3% percent invested in SPY and so on so that the daily rebalancing of our hypothetical portfolio reflected what the “A6” determined the market’s internal health to be on that particular day.

The next question for us to answer was “how do Asbury Research customers use this information?” as most investors do not want to rebalance their portfolios daily.  The primary purpose of the Asbury 6 is to provide an objective, data-driven methodology to determine how much capital investors should be deploying into the stock market.  One of the most common questions we are asked by subscribers is this: “I have (x) percent of my portfolio invested in the stock market right now.  Should I be increasing or decreasing that percentage today, and by how much?”  The Asbury 6 empirically answers that question. 

We back-tested this updated version of the Asbury 6 over the past 5 years. Our process for testing data-driven models at Asbury Research is typically kept within the five to seven year range because debt cycles and market dynamics are constantly shifting.  What works in one market for a particular period of time may not be consistent from period to period, as global market conditions are constantly changing.   This is readily apparent by looking at correlation comparisons over time.  Very rarely will you see an indicator have the same veracity on its correlation with market returns throughout all time periods. Therefore, by keeping the testing periods short, we can better conclude that our indicators are still a valid market health check today rather than being skewed by positive results from “older” markets that may be operating amid different environmental conditions,

The other important fact about the previous 5-year time period is that it has atypically included widely varying market conditions. During this period, the Federal Reserve engineered both zero rate and rising rate environments, the economy has gone through a 100-year pandemic shock, and the stock market has had bot bullish and bearish major trends.  The line chart below shows that the Asbury 6 has been able to keep pace with the market throughout this difficult period while avoiding the major downturns.

Asbury 6 vs S&P 500: 2018-2023

Click chart and table below to enlarge

Moreover, the table below shows that the incrementally-tested Asbury 6 has essentially been a relative performer versus the S&P 500 over the past 5 years but with a maximum drawdown that was roughly half of the S&P 500, and with about half the risk according to both beta and standard deviation.

Asbury 6: Risk/Reward Data 2018-2023

In conclusion, this updated version of the Asbury 6 shows that, based on backtested quantitative strategies, it is possible to participate in the stock market and produce similar results with significantly lower risk.  

Information about the various quantitative metrics referred to above can be found on Investopedia.com.